A renewed cycle of farmer distress

Farm-loan waivers are costly palliatives that cause long-term damage

Illustration: Shyamal Banerjee/Mint
Illustration: Shyamal Banerjee/Mint

Every decade or so, India’s farmers find themselves in distress. Crop prices plunge, debts mount and if there is real bad luck, the monsoon fails. Soon enough, farmers begin committing suicides and in the din of noise about agrarian distress the government of the day takes some steps. They are no more than palliatives and end up doing more harm than good.

Today, India is in that situation once again. Prices of commodities such as wheat, soybean, rice, cotton, sugar and milk have collapsed. The signs are everywhere to be seen. In West Bengal, potato growers are committing suicide amid mountains of the rotting tuber. In Maharashtra’s Vidarbha region, the distress centre of farming in India, farmers have been stressed since last year, when the region received 20% less rainfall than the Long Period Average (LPA). In the Marathwada region of the state, this figure was a terrible 44% of the LPA. In Uttar Pradesh, the collapse in sugar prices is not only hurting the farmers badly, but the very future of the sugar industry is troubled. The mills are in no position to pay arrears to farmers.

The government responds by waiving off loans of farmers and rolling out a food-for-work programme to ensure that farmers don’t take extreme steps such as killing themselves. Waiving off loans may temper the suffering of farmers for a time but they don’t solve the original problem. The cost of such a programme—both current and in terms of future moral hazard—is immense. The last loan waiver in 2008—which involved close to 60 million rural households—led to a debt waiver of $16-17 billion. It was one the largest programmes of its kind in history.

Arguments for a debt reduction/waiver programme are simple. Distressed farmers have a large debt overhang and the repayment of interest and the loan principal leaves them with little for investment. The result is that output and productivity suffer. Reducing this overhang can spur agricultural growth once again.

A November 2014 study by two World Bank economists, Xavier Gine and Martin Kanz (The Economic Effect of a Borrower Bailout: Evidence from an Emerging Market, World Bank Policy Research Paper number 7109), studied all of India’s districts for the years 2001-12 in terms of debt relief amounts and economic outcomes. The results of this study were contrary to the logic offered by those building a case for debt waiver. These economists found that while the level of debt did go down, it did not lead to higher investment, consumption or even a growth in rural wages. Instead, banks involved in the write-off moved away credit allocation from districts where the level of waivers was high. In high-bailout districts, borrowers began to default on loans after the waiver. What the programme left in its wake were districts starved of money (as banks moved away to less-risky districts) and a higher incidence of loan defaults.

This is hardly a solution to the agricultural crisis that is building up.

The truth of the matter is that weaknesses of the agriculture sector are specific to the agro-climatic/ecological regions of the country and the crops/commodities in question. In West Bengal, it is an administrative failure to help farmers get their potato crop to cold storage; in Uttar Pradesh, it is the political economy of the sugar industry that is at work; in Maharashtra, it is the plain (and painful) absence of risk-management practices that is to be blamed for the deaths of farmers. A loan-waiver programme may seem an appropriate response, but it won’t do much except kick the can further down the road.

India’s developmental failure since 1947 has been its inability to move the huge mass of people involved in agriculture to industry and services. As the share of agriculture in the national output pie falls, any crisis hurts those dependent on it disproportionately. Some tentative, long-term steps are being taken by the current government—insurance for all citizens, emphasis on skill-enhancement programmes, etc.—but these need time to have an effect. Until then, India’s farmers will be hostage to inclement weather.

What are the reasons for the new cycle of crisis in Indian agriculture? Tell us at views@livemint.com

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